May 2017; Kenya Central Bank Retains Key Rate For Fourth Session

In line with market expectations, Kenya’s Central Bank (CBK) has for the fourth time left its benchmark interest rate on hold at 10 percent at its May 29th 2017 meeting.

The Bank said it expects the inflation rate to remain well above the government’s target range of 2.5-7.5 percent due to elevated prices for some food items. Yet, the country’s April inflation increased further in April to a 57th Month high of 11.48 per cent from the previous month’s 10.28 percent, the highest over the last 57 months.

Excerpts from the statement by the Central Bank of Kenya:

Overall inflation rose to 11.5 percent in April from 10.3 percent in March 2017, due to increases in food prices, notably sifted maize flour, sugar, kales (sukuma wiki) and tomatoes. Nevertheless, the recent rains and interventions by the Government are expected to provide some relief.

Foreign exchange market has remained stable, supported by a narrower current account deficit. Receipts from tea and horticulture are resilient despite lower export volumes due to adverse weather conditions in the first quarter of 2017. Additionally, receipts from tourism, coffee exports, and diaspora remittances have remained strong.

The CBK’s foreign exchange reserves are at all-time high levels. They currently stand at USD8,235.9 million (5.4 months of import cover) compared to USD7,716.4 million (5.1 months of import cover) at the end of March 2017. These reserves, together with the Precautionary Arrangements with the International Monetary Fund (IMF), equivalent to USD1.5 billion, continue to provide a buffer against short-term shocks.

Banking sector remains resilient. The average commercial banks’ liquidity and capital adequacy ratios stood at 44.4 percent and 18.8 percent, respectively in April 2017. The ratio of gross non-performing loans to gross loans decreased marginally to 9.6 percent in April from 9.7 percent in February 2017.

On the slowdown in private sector credit growth, which was largely due to factors in trade, manufacturing, real estate, and private households, the Committee noted that credit to private households, manufacturing, and real estate had picked up in March and April 2017.

The Committee evaluated available data on the impact of capping interest rates. The number of loan applications increased by 23.4 percent between August 2016 and April 2017, but the value of loan applications decreased by 18.3 percent, suggesting smaller size of loan applications. The number of loan approvals increased by 35.7 percent while their value decreased by 16.3 percent. Moreover, commercial banks’ lending to Micro, Small and Medium Enterprises (MSMEs) fell by an estimated 5.7 percent between August 2016 and April 2017, but with small banks recording an increase on average.

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